Bluestone Market Research

U.K. PICKS THE WORST OPTION

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

* The U.K. has no idea what it wants to do with BREXIT, and that’s bad for business.

* U.S. Job Openings jump back above 7 million, while Consumer Credit surges.

* Japan Q3 GDP is revised lower.

* China trade surplus improves due to drop in imports – not a good sign.

* Aussie New Home loans rebounded, but remain negative Y/Y.

* Canada Housing Starts improved while Permits fell in October.

U.K. CAN’T DECIDE ON BREXIT, WHICH IS THE WORST POSSIBLE OUTCOME:

We watched U.K. Prime Minister Teresa May’s speech to the House of Commons and believe that the delay in the vote is the worst possible outcome for the U.K.    As best we can tell, Mrs. May got about as good a deal as she could get from the EU.   She won’t be paying them any longer, has wrestled control of her borders and laws, and still gets to trade freely with Europe.   We’re not sure what the Commons can possibly be expecting, but we think a ‘hard border’ with Ireland would create unnecessary economic damage to the U.K.

But regardless of the specifics of the deal, the worst case scenario is limbo, and that’s exactly where the U.K. appears to be headed.   Businesses cannot make investments and decisions when politicians can’t get their act together.   We now expect that U.K. economic conditions will worsen from here.   On that note, U.K. Industrial Production is now negative….

U.K. INDUSTRIAL PRODUCTION DOWN FOR 2ND MONTH IN A ROW:

According to the U.K. Office for National Statistics, the Index of Production declined for the second consecutive month, down -0.58% M/M in October.  Moreover, U.K. industrial output is now down -0.78% Y/Y (versus flat Y/Y prior), which is the slowest pace since August 2013.  In the month, Energy output increased +0.40% M/M, Mining output increased +1.77% M/M, and Durable Goods output increased +1.25% M/M.  Conversely, Manufacturing output fell -0.96% M/M, Water & Sewage output fell -0.29% M/M, and Non-Durable Goods output fell -1.59% M/M.

 

 

JOB OPENINGS BACK ABOVE 7 MILLION IN OCTOBER:

According to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), there were 7.079 million job openings on the last business day of October.  This is an increase of +119k M/M from the downwardly revised prior month (6.96 million vs. 7.009 million previously reported) and job openings are now up +16.8% Y/Y (versus +11.7% Y/Y prior).  In fact, there are more job openings than unemployed persons in the U.S. for the eighth month in a row.  Also, total hires rebounded +196k to 5.892 million, whereas total separations fell -85k to 5.556 million.  Thus, net turnover increased +281k M/M to +336k.

 

 

Furthermore, the Job Openings rate increased to 4.5% (4.5% prior), the Hires rate increased to 3.9% (3.8% prior), and the Separations rate fell to 3.7% (3.8% prior).   Lastly, it should be noted that Quits fell -51k M/M to 3.34 million (SA) and non-seasonally adjusted quits fell -147k to 3.458 million.  The slowdown in quits may be due to the fact that employers are now paying their employees higher wages in order to retain talent.

 

 

CONSUMER CREDIT UP +$25 BILLION M/M IN OCTOBER:

Late Friday, the Federal Reserve released its report on consumer credit for the month of October, showing overall consumer credit increased a seasonally-adjusted +$25.384 billion to a record $3.964 trillion.  This is the 34th consecutive monthly gain and total credit increased +4.7% Y/Y (+4.5% Y/Y prior).  The increase in the month was led by Non-revolving credit, which increased +$16.175 billion to $2.926 trillion (+5.9% Y/Y vs. +5.4% prior).  Also, Revolving credit rebounded +$9.209 billion M/M to a record high $1.037 trillion (+3.4% Y/Y versus +3.0% prior).

 

 

Furthermore, on a not-seasonally adjusted basis, consumer credit increased +$22.15 billion in October to a record high $3.885 trillion.  In the month, government loans (student loans) increased for the 80th consecutive month (+$2.58 billion to a record $1.262 trillion).  Also, non-government loans increased for the seventh consecutive month (+$19.57 billion), led by significant increases in loans from Depository Institutions and Credit Unions; however, Nonfinancial loans fell -$0.063 billion.

 

 

JAPAN Q3 2018 GDP REVISED LOWER TO -0.6% Q/Q:

According to the Japan Cabinet Office, Q3 2018 Real GDP in Japan was revised lower to -0.63% Q/Q (versus -0.29% previously reported).  Furthermore, Q3 GDP declined at an annualized rate of -2.53%, versus +2.73% in Q2.  In the quarter, there were downward revisions to Private Consumption (-0.18% Q/Q vs. -0.11% previously reported) and Private Non-Resident Investment (-2.75% Q/Q vs. -0.23%) Conversely, Government Expenditures were revised slightly higher to +0.23% Q/Q (+0.18% Q/Q previously reported).

 

 

CHINA TRADE SURPLUS IMPROVED AS IMPORTS SLOWED IN NOVEMBER:

In U.S. Dollar terms, China’s National Bureau of Statistics reported that China’s trade balance increased +$9.99 billion to +$44.75 billion in November.   In the month, China’s exports increased +$10.32 billion M/M to $227.42 billion.  Nonetheless, exports slowed to +5.4% Y/Y (versus +15.5% Y/Y prior).  Meanwhile, China imports increased just +$0.33 billion M/M to $182.67 billion; therefore, imports slowed to +3.0% Y/Y (versus +20.8% prior).  It is important to note that Cumulative trade in 2018 up +14.8% Y/Y to $4.244 trillion (+16.0% Y/Y prior).  Moreover, in Chinese Renminbi terms, China’s trade balance improved once again M/M and exports were up +10.2% Y/Y (versus +20.0% Y/Y prior).

Note, exports to the U.S. slowed to +9.8% Y/Y (+13.2% Y/Y prior), exports to the EU slowed to +6.0% Y/Y (+14.6% Y/Y prior), exports to the Hong Kong slowed to +2.7% Y/Y (+23.6% Y/Y prior), exports to Japan slowed to +4.8% Y/Y (+7.9% prior), and exports to Russia slowed to +2.9% Y/Y (+16.0% Y/Y prior).  Furthermore, Crude Oil imports increased to 42.87 million metric tons (+15.7% Y/Y versus +25.3% Y/Y prior) but Copper Ore imports fell -4.6% Y/Y (+14.6% Y/Y prior) in November.

 

 

CHINA CPI SLOWED TO +2.2% Y/Y IN NOVEMBER:

According to the China Bureau of Statistics, the Consumer Price Index declined for the first time in five months, down -0.3% M/M in November.  Furthermore, on a Y/Y basis, China CPI slowed to +2.2% Y/Y (versus +2.5% Y/Y prior), which is the slowest pace since July.  In the month, Food prices slowed to +2.5% Y/Y (+3.3% prior) and Non-food prices slowed to +2.1% Y/Y (versus +2.4% Y/Y prior).  Lastly, China PPI declined for the first time in seven months, down -0.2% and slowed to +2.7% Y/Y (+3.3% Y/Y prior).

 

 

AUSTRALIAN NEW HOME LOANS REBOUNDED IN OCTOBER:

According to the Australian Bureau of Statistics, the number of Australian Home Loans rebounded +2.20% M/M to 52,654 in October (-1.00% M/M prior) Therefore, Aussie loans are now down -4.78% Y/Y, which is an improvement versus -8.44% Y/Y prior.   Moreover, in Aussie Dollar terms, total loans outstanding rebounded +2.56% M/M and improved to -8.61% Y/Y to $30.03 billion (versus -10.76% Y/Y prior).  As for the composition in A$ terms, Owner Occupied Housing loans increased +3.54% M/M to 20.15 billion and Investment Housing increased +0.60% M/M to 9.88 billion.

 

 

GERMAN TRADE DATA BALANCE LITTLE CHANGED IN OCTOBER:

In the month of October, the German foreign trade balance fell -€0.4 billion to +€17.3 billion (seasonally adjusted), according to Destatis.  In the month, Exports increased +0.7% M/M to €110.8 billion, whereas imports increased +1.3% M/M to €93.5 billion Furthermore, on an unadjusted basis, Germany’s trade surplus was unchanged at +€18.3 billion.  On a Y/Y basis, exports increased +8.5% Y/Y to €117.2 billion (-1.0% prior) and imports increased +11.2% Y/Y to €98.9 billion (+5.6% Y/Y prior).  Note, the EUR/USD exchange fell -2.5% M/M and -2.9% Y/Y to 1.131 at the end of October

 

 

ITALIAN INDUSTRIAL PRODUCTION UP SLIGHTLY IN OCTOBER:

According to iStat, Italian Industrial Production increased +0.09% M/M in the month of October (-0.09% prior).  Nonetheless, total output slowed to +1.05% Y/Y when adjusted for working days (+1.44% Y/Y prior).  In the month, Consumer Goods output increased +1.34% M/M; however, Intermediate Goods output declined -0.28% M/M, Investment Goods output declined -0.09% M/M, and Energy output declined -2.95% M/M.

 

 

CANADA HOUSING STARTS DOWN -13.7% Y/Y DESPITE MONTHLY INCREASE IN NOVEMBER:

According to the Canada Mortgage and Housing Corporation, housing starts increased +4.44% M/M to 215,941 SAAR in November.  In fact, this is the second consecutive monthly increase (+8.39% M/M prior); however, housing starts are now down -13.74% Y/Y (versus -6.81% Y/Y prior).  The increase in the month was led by Urban Single-Family housing starts, which increased +7.79% M/M and to a lesser extent, Urban Single-Family starts (+3.91% M/M).  Conversely, Rural starts declined -1.13% M/M.

In a related note, Canadian Building Permits increased +4.05% M/M and +7.39% Y/Y to 20,017 in October (+10.34% Y/Y prior).  In the month, Single-Family permits increased +2.18% M/M and Multi-Family permits increased +4.70% M/M.  However, it should be noted that the value of permits fell -0.15% M/M and -4.04% Y/Y (-0.40% Y/Y prior)

 

 

AMERICAS:

U.S. GDP:  Our GDP model sees 3%+ Real GDP growth through Q1 2019, but slower growth thereafter (downshifting to 2%).  Our model doesn’t factor in the stimulus from the recent tax cut, so the growth reversal in 2019 could be more pronounced than our model appreciates (it is presumed that 2018 will be better than our model due to the tax cut, whereas the delta for 2019 would be worse than our model predicts).

U.S. Inflation:  U.S. inflation appears to have hit a peak three months ago and with oil prices down and the dollar index up, we believe inflation has peaked (for now).   

U.S. Federal Reserve:  With signs that both inflation and growth are moderating a touch, we think there is increasing odds that we are approaching a ‘Fed Pause’ in 2019.

U.S. Treasuries:  The trade war and recent movement toward a Fed Pause have pushed longer-term rates lower.   But we still believe economic fundamentals support a 10-year yield of approximately 3%.   We would expect that rates will only drift higher once the Fed pauses, as that ultimately would lead to a weakening in the U.S. Dollar.

Although recent inflation data has been cooling, the job market remains tight and Real GDP trending is still trending well above +3.0%.  With that in mind, we still believe the yield on the 10-year U.S. Treasury will trend higher (but it’s getting harder to reach 3.50% as inflation and growth slow). 

U.S. Equities and Earnings:  S&P 500 operating earnings are still rising, but the market seems to be repricing forward earnings.  Our SPX target was for an 18.5x P/E on 2019 forward earnings of $165, bringing our 2018 SPX target to 3,050.  With the China trade war heating up, we are not setting a target for 2020 at this time. 

Argentina:  The macro looks abysmal in Argentina, and they have IMF involvement, but there is a silver lining here in that Q2 GDP was so bad that it might be hard for Q3 to be negative!  Overall, Argentina’s economic condition appears to have weakened in 2018.   Inflation is at a lofty 45%, Industrial Production is down -6.8% Y/Y, Consumer Confidence has deteriorated since January, imports are declining, and Unemployment jumped to 9.6% in Q2 (7.2% in Q4 2017).

Brazil:  Following Brazil’s election, Consumer Confidence has turned higher and PMI’s have indicated a return to growth.  We are encouraged by recent developments, but with the Bovespa near its record high, we need to see more follow-through with macro data.  Currently, GDP is up just 1% Y/Y, Industrial Production is down -2.0% Y/Y, Retail Sales slowed to +0.1% Y/Y, and Unemployment continues to be elevated (11.7% in October, which is an improvement).

Canada: Canada’s housing market has been weak and Permits fell in October.  Note that monthly GDP turned negative in October (-0.1% M/M).  We have concerns for Canada’s outlook given declining oil prices and we wonder how long Canada’s employment market can remain so resilient.  

Mexico: Mexico’s macro data is mixed.  Manufacturing PMI’s are hovering at or below the “50” level, But retail sales accelerated to a 4.1% Y/Y rate, Confidence is strong, and GDP is up 2.5% Y/Y.  Note that Unemployment improved to 3.2% in October, which had been trending up slightly since May.

Venezuela: Remains uninvestable.

EMEA:

United Kingdom:  BREXIT is a mess.  Industrial Production is negative.  GDP is slowing.   The U.K. has officially botched this.

European Union:  Although Unemployment continues to trend lower, Industrial Production is now up +0.9% Y/Y, and Retail Sales are now up +0.8% Y/Y, Economic Sentiment is turning lower, and PMI’s have turned back from recent highs, and the political situation has gotten so bad that Merkel isn’t going to run again.  The events in Italy foreshadow possible macro risks for Europe, as monetary accommodation is removed.  We still believe Europe is uninvestible.  

European Central Banks:  The ECB is slowly removing accommodation and has reiterated its claim that bond buying is over in December.  But Mario Draghi hasn’t given a timeline for raising rates and the recent decline in CPI will give them even further pause for doing so

Eastern Europe: Ukraine situation aside, we saw earlier in the year with Italy, nations with high debt levels can rapidly become front-burner macro items.  The same can be said for Eastern Europe, given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).   We also have the EU Article 7 issues against Hungary and Poland to watch as well.  The world is turning farther right, and pressure from unelected EU leaders will only push these nations further right.

South AfricaWe remain negative on South Africa, but we have noticed recent efforts by the ANF to walk back some of the rhetoric and GDP recently rebounded.   The ANF is now trying to reengage with foreign capital and wants to liberalize some of the rules around mining investment.   In our view, the mere risk of having assets appropriated will grind foreign capital commitments and new business investment to a screeching halt, and more time is going to need to pass in order for foreign investors to feel any degree of confidence.  Our best guess is that more downside exists for South Africa’s economy and we believe the currency and equity market will suffer as a result.

Turkey:  Remains uninvestable.

ASIA / PACIFIC:

Australia:  The Australian data remain mixed but we have serious concerns about China exposures and weakness in housing markets.  With that in mind, we have a short view on Australian equities.  So far, the macro remains OK as the Unemployment Rate appears to be ticking lower (to +5.0% in October), Real GDP accelerated to +3.4% Y/Y in Q2, Exports are up +15.9% Y/Y, Wages are up +2.1% Y/Y, Retail Sales accelerated to +3.7% Y/Y in September, and Consumer Sentiment has ticked slightly higher recently.  However, consumer credit remains elevated and the value and number of home loan approvals and permits have turned negative, which is a bad sign as home prices have turned negative as well.

China:   Now that the market has digested the Fake Truce, China’s economic data continue to deteriorate, as PMI’s are now bouncing around the ‘50’ level (although services PMI bounced back last week).   We don’t think 6% growth is still in the cards for China … maybe note even 5%, or 4% or 3%……

India:  Indian economic activity appears strong, which runs counter to worries about shadow banking issues.  Commercial Credit accelerated to +14.6% Y/Y in October, Industrial production has been strong, M3 money growth has been steady at 10%, and PMI’s improved in November.

Indonesia:  Indonesia had gone four years without raising rates, but now rates have been hiked +125bps since Mid-April.   Indonesia’s GDP and Private Consumption Expenditures are up over +5% Y/Y, Consumer Confidence has been stable, Manufacturing PMI had been stable in the 49-51 range for a year and slowed to 50.5 in October, Industrial Production rebounded +9.0% Y/Y.  However, Retail Sales slowed slightly to +3.9% Y/Y and Exports slowed to +3.6%.

Japan:  Overall, the economic data have been mixed but we are encouraged by Prime Minister Abe’s promise to fix social security, immigration, and workforce participation.   We are slowly becoming positively biased, but recent data haven’t given us enough rationale.

Russia: Russia just can’t help itself.   The sanctions are beginning to have an impact on Russia and Russia is up to its antics again with Ukraine.  We find Russia uninvestible at this time.

South KoreaThe Bank of Korea raised rates +25 basis points to 1.75% (first hike in a year.  Overall, the economic data have been mixed.  While the world looks forward to peace on the Korean Peninsula, we are keeping an eye on trade data into China, which increased +17.7% Y/Y in October.   Also, GDP increased +2.0% Y/Y in Q3, Income is up +4.2% Y/Y, Industrial Production increased +0.9% Y/Y, and the Unemployment Rate improved to 3.9% in October.  Conversely, Retail Sales slowed to +3.0% Y/Y.

MACRO TRADE IDEAS:

 

 

GLOBAL CENTRAL BANK SCORECARD:

 

 

WEEK IN REVIEW – BEST & WORST PERFORMERS:

S&P 500 SECTOR PERFORMANCE:

 

 

BEST/WORST PERFORMING WORLD BOND MARKETS:

 

 

BEST/WORST PERFORMING GLOBAL STOCK MARKETS:

 

 

CURRENCIES PERFORMANCE:

 

 

COMMODITIES MARKET PERFORMANCE:

 

 

MAJOR GLOBAL STOCK MARKETS:

 

 

MAJOR GLOBAL BOND MARKETS:

 

A CHRISTMAS TRUCE

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

* We think there is no substance to the “truce”, aside from an attempt to buoy markets.

* U.S. ISM Index turned higher in November, while Construction Spending fell in October.

* China PMI’s still bouncing around the ‘50’ level.

A CHRISTMAS TRUCE:

During the very early months of World War I, an unofficial ‘Christmas Truce’ occurred in December 1914.  Such ceasefires were reported on a widespread basis, and in some instances soldiers reportedly exchanged souvenirs and food with opposing forces.  There were joint burial ceremonies, prisoner swaps, Christmas caroling, and many say that a friendly game of soccer broke out between English and German troops on Christmas Day.   You can read about it here:  https://www.pbs.org/newshour/world/ww1-soccer-photos

Truces give hope and ease the pain of war.  But we must remember that WW1 continued on for nearly four years after the Christmas Truce.   An estimated 40 million military and civilian casualties occurred during WW1, most coming after this so-called ‘Truce’.   Unfortunately, the Christmas Truce didn’t stop the German army from deploying chemical weapons against the Russians just one month later during the Battle of Bolimow.   The Christmas Truce certainly didn’t prevent one of the bloodiest battles in human history, the Battle of Somme, where one million men were injured or killed. 

In fact, after a couple years of intense fighting and chemical weapons use (you can read about that here: https://is.gd/wGcutl) the desire to have ceasefires with the enemy came to an abrupt end.  By the end of 1916, all that the opposing soldiers wanted to do was kill each other.

This brings us to the current “Trade Truce” between the United States and China.   As best we can tell, absolutely nothing meaningful came from the weekend ‘truce’, aside a pushout of further tariffs by 90 days (probably would have happened anyway).  

Trump is tweeting that “China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%” but we can’t actually find any confirmation that China has said that at all.  In fact, this was old news from April when Chinese President Xi Jinping pledged to lower the tariff from 25% to 15%.  However, by July, China had added a 25% retaliatory tariff surcharge on top of the 15%, to bring the total tariff to 40%.   We will assume that the 25% auto import surcharge is about to be removed, which means there still will be a 15% tariff on U.S. cars going into China, which is exactly what it would have been in July had the trade war not heated up.

We remind you that nothing has been said about progress on IP protection.   Nothing has been said about stopping technology transfer, which would require China to re-write laws on foreign corporate ownership.  Nothing has been said about an espionage truce.   In fact, Treasury Secretary Mnuchin is already throwing cold water on the truce.   In a phone interview with the Financial Times, Mr. Mnuchin said, “There’s a 100 per cent unanimous view on our economic team that this needs to be a real agreement.  These can’t be soft commitments from China. There need to be specific dates, specific action items.”   We wish Mr. Mnuchin good luck but we doubt there will be a meaningful agreement.   We still believe China’s economy is in the midst of meaningful deterioration and we expect more tariff headaches to come in three months.  

U.S. ISM MANUFACTURING INDEX PICKED UP IN NOVEMBER:

The ISM Manufacturing Index increased +1.6 points to 59.3 in November This is the 27th consecutive month of growth in the manufacturing sector.  In the month, there were notable increases in New Orders (+4.7 points to 62.1), Production (+0.7 points to 60.6), Employment (+1.6 points to 58.4), Inventories (+2.2 points to 52.9), and Backlogs (+0.6 points to 56.4).  Conversely, Prices Paid plunged -10.9 points to 60.7, which is the lowest level since June 2017. 

 

 

U.S. CONSTRUCTION SPENDING DOWN FOR 3RD MONTH IN A ROW:

According to the Census Bureau, U.S. Construction Spending declined for the third consecutive month, down -0.1% M/M in October to a total value of $1,308.9 billion SAAR On a Y/Y basis, construction spending slowed to +4.9% Y/Y (vs. +5.7% prior).  In the month, Nonresidential Construction increased +0.1% but slowed to +7.3% Y/Y (+8.3% Y/Y prior) and Residential Construction declined -0.5% M/M and slowed to +1.7% Y/Y (+2.2% Y/Y prior) Lastly, Public Construction increased +0.8% M/M but slowed to +8.5% Y/Y (+10.6% Y/Y previously) and Private Construction fell -0.4% M/M and slowed to +3.9% Y/Y (+4.3% Y/Y prior).

 

 

CAIXIN CHINA MANUFACTURING PMI INCREASED MARGINALLY IN NOVEMBER:

We like to compare the ‘official’ government PMI data against the independent Caixin/Markit PMI data.  In November, the Caixin Manufacturing PMI increased +0.1 points to 50.2.    Note, that the “official” Manufacturing Index fell -0.2 points to 50.0.  Thus, either way you spin it, manufacturing in China has stalled and it is barely above trend in the month of November.  In the month, New Orders increased and Input Costs fell to the lowest level in seven months; however, New Exports and Employment declined.

According to Caixin, “Overall, domestic demand across the manufacturing sector improved in November, while overseas demand was still subdued. Production slowed, confidence was relatively stable, capital turnover was improved, and upward pressure on industrial product prices eased. China’s economy was weak, but did not show significant signs of deterioration.”

 

 

AMERICAS:

U.S. GDP:  Our GDP model sees 3%+ Real GDP growth through Q1 2019, but slower growth thereafter (downshifting to 2%).  Our model doesn’t factor in the stimulus from the recent tax cut, so the growth reversal in 2019 could be more pronounced than our model appreciates (it is presumed that 2018 will be better than our model due to the tax cut, whereas the delta for 2019 would be worse than our model predicts).

U.S. Inflation:  U.S. inflation appears to have hit a peak three months ago and with oil prices down and the dollar index up, we believe inflation has peaked (for now).   

U.S. Federal Reserve:  With signs that both inflation and growth are moderating a touch, we think there is increasing odds that we are approaching a ‘Fed Pause’ in 2019.

U.S. Treasuries:  Although recent inflation data has been cooling, the job market remains tight and Real GDP trending is still trending well above +3.0%.  With that in mind, we still believe the yield on the 10-year U.S. Treasury will trend higher (but it’s getting harder to reach 3.50% as inflation and growth slow). 

U.S. Equities and Earnings:  S&P 500 operating earnings are rising materially, but the market seems to be repricing forward earnings.  Our SPX target is for an 18.5x P/E on 2019 forward earnings of $165, bringing our 2018 SPX target to 3,050.  We prefer financials given expectations for economic growth and an improving (steepening) yield curve.

Argentina:  The macro looks abysmal in Argentina, and they have IMF involvement, but there is a silver lining here in that Q2 GDP was so bad that it might be hard for Q3 to be negative!  Overall, Argentina’s economic condition appears to have weakened in 2018.   Inflation is at a lofty 39.5%, Industrial Production is down -11.5% Y/Y, Exports are down -4.8% Y/Y, Consumer Confidence has deteriorated since January, the Economic Activity Index collapsed in May, and Unemployment jumped to 9.6% in Q2 (7.2% in Q4 2017).

Brazil:  Following Brazil’s election, Consumer Confidence has turned higher and PMI’s have indicated a return to growth.  We are encouraged by recent developments, but with the Bovespa near its record high, we need to see more follow-through with macro data.  Currently, GDP is up just 1% Y/Y, Industrial Production is down -2.0% Y/Y, Retail Sales slowed to +0.1% Y/Y, and Unemployment continues to be elevated (11.7% in October, which is an improvement).

Canada: Canada’s housing market has been weak but recent data have shown signs of life in housing starts.  Not to mention, Retail Sales have improved for two straight months.  Canada’s monthly Real GDP had been in a slowing trend for a year.  Employment picked up in October as the Unemployment Rate fell to 5.8% from 6% two months ago.

Mexico: Mexico’s macro data is mixed.  Manufacturing PMI’s are hovering at or below the “50” level, But retail sales accelerated to a 4.1% Y/Y rate, Confidence is strong, and GDP is up 2.5% Y/Y.  Note that Unemployment improved to 3.2% in October, which had been trending up slightly since May.

Venezuela: Remains uninvestable.

EMEA:

United Kingdom:  BREXIT drama aside, inflation has been in a slowing trend in 2018, unemployment has been declining, wages have been turning up, and PMI’s have been steady.   Even the big macro risk, housing, hasn’t shown much weakness.  In fact, home prices improved slightly in August on a Y/Y basis.

European Union:  Although Unemployment continues to trend lower, Industrial Production is now up +0.9% Y/Y, and Retail Sales are now up +0.8% Y/Y, Economic Sentiment is turning lower, and PMI’s have turned back from recent highs, and the political situation has gotten so bad that Merkel isn’t going to run again.  The events in Italy foreshadow possible macro risks for Europe, as monetary accommodation is removed.  We still believe Europe is uninvestible.  

European Central Banks:  The ECB is slowly removing accommodation and has reiterated its claim that bond buying is over in December.  But Mario Draghi hasn’t given a timeline for raising rates and the recent decline in CPI will give them even further pause for doing so

Eastern Europe: Ukraine situation aside, we saw earlier in the year with Italy, nations with high debt levels can rapidly become front-burner macro items.  The same can be said for Eastern Europe, given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).   We also have the EU Article 7 issues against Hungary and Poland to watch as well.  The world is turning farther right, and pressure from unelected EU leaders will only push these nations further right.

South AfricaWe remain highly negative on South Africa, but we have noticed recent efforts by the ANF to walk back some of the rhetoric.   The ANF is now trying to reengage with foreign capital and wants to liberalize some of the rules around mining investment.   Politics aside, the macro picture is getting bleaker by the day as Business Confidence is rolling over, GDP is negative, Inflation has turned up, Retail Sales are barely positive, and PMI’s are bouncing around the ‘50’ level.  None of this will help unemployment (27.2% in Q2).   In our view, the mere risk of having assets appropriated will grind foreign capital commitments and new business investment to a screeching halt, and more time is going to need to pass in order for foreign investors to feel any degree of confidence.  Our best guess is that more downside exists for South Africa’s economy and we believe the currency and equity market will suffer as a result.

Turkey:  Remains uninvestable.

ASIA / PACIFIC:

Australia:  The Australian data remain mixed but we have serious concerns about the decline in building approvals and new home loans, as well as China exposures.  With that in mind, we have a short view on Australian equities.  So far, the macro remains OK as the Unemployment Rate appears to be ticking lower (to +5.0% in October), Real GDP accelerated to +3.4% Y/Y in Q2, Exports are up +15.9% Y/Y, Wages are up +2.1% Y/Y, Retail Sales accelerated to +3.7% Y/Y in September, and Consumer Sentiment has ticked slightly higher recently.  However, consumer credit remains elevated and the value and number of home loan approvals and permits have turned negative, which is a bad sign as home prices have turned negative as well.

China:   Is this a Trace Truce or is this Fake News?  Maybe we’ll coin it Fake Truce.   We don’t believe anything meaningful has come out of the Trump/Xi dinner and we wonder how long it will take before the market digests that.   Meanwhile, China’s economic data continue to deteriorate, as PMI’s are now bouncing around the ‘50’ level.   That doesn’t sound like 6% growth at all.  Or 5%, or 4% or 3%……

India:  Indian economic activity appears strong, which runs counter to worries about shadow banking issues.  Commercial Credit accelerated to +14.6% Y/Y in October, Industrial production has been strong, M3 money growth has been steady at 10%, and PMI’s still show growth (albeit slower).  We are watching to see if any deterioration happens.

Indonesia:  Indonesia had gone four years without raising rates, but now rates have been hiked +125bps since Mid-April.   Indonesia’s GDP and Private Consumption Expenditures are up over +5% Y/Y, Consumer Confidence has been stable, Manufacturing PMI had been stable in the 49-51 range for a year and slowed to 50.5 in October, Industrial Production rebounded +9.0% Y/Y.  However, Retail Sales slowed slightly to +3.9% Y/Y and Exports slowed to +3.6%.  If there’s one emerging market that we’d be inclined to be bullish, this would be it, but we’d need to see the free-fall in the currency come to an end first.

Japan:  Overall, the economic data have been mixed but we are encouraged by Prime Minister Abe’s promise to fix social security, immigration, and workforce participation.   We are slowly becoming positively biased.

Russia: Russia just can’t help itself.   The sanctions are beginning to have an impact on Russia and Russia is up to its antics again with Ukraine.  We find Russia uninvestible at this time.

South KoreaLate last week, the Bank of Korea raised rates +25 basis points to 1.75% (first hike in a year.  Overall, the economic data have been mixed.  While the world looks forward to peace on the Korean Peninsula, we are keeping an eye on trade data into China, which increased +17.7% Y/Y in October.   Also, GDP increased +2.0% Y/Y in Q3, Income is up +4.2% Y/Y, Industrial Production increased +0.9% Y/Y, and the Unemployment Rate improved to 3.9% in October.  Conversely, Retail Sales slowed to +3.0% Y/Y.

MACRO TRADE IDEAS:

 

 

GLOBAL CENTRAL BANK SCORECARD:

 

 

WEEK IN REVIEW – BEST & WORST PERFORMERS:

S&P 500 SECTOR PERFORMANCE:

 

 

BEST/WORST PERFORMING WORLD BOND MARKETS:

 

 

BEST/WORST PERFORMING GLOBAL STOCK MARKETS:

 

 

CURRENCIES PERFORMANCE:

 

 

COMMODITIES MARKET PERFORMANCE:

 

 

MAJOR GLOBAL STOCK MARKETS:

 

 

MAJOR GLOBAL BOND MARKETS:

 

EVERYONE WANTS A DEAL

FAST FACTS ABOUT TODAY’S ECONOMIC DATA:

* Italy softens its budget tone, while U.K. gathers support for BREXIT deal.

* Meanwhile, Russia/Ukraine is heating up.

* Mario Draghi says Europe has slowed (temporarily) and German Ifo Index heads lower.

* Chicago Fed Index improved while Dallas Fed Index slowed.

WHEELING AND DEALING AROUND THE WORLD:

Everyone likes a good deal, and that is particularly true when it comes to negotiating in Europe.   With that in mind, two European macro risks have downshifted a little of late.

Italy Wants a Deal:  According to Reuters’ government sources (which we hold with little regard in Europe), Italy finally wants to avoid disciplinary action by the EU and is planning to reduce next year’s budget deficit target to 2.0% of GDP.  This news comes as League party leader, Matteo Salvini, said that the EU has offered “positive feedback.”   Taking it a step further, Salvini said, “What is important is that the budget contains the goals that we have established … if the negotiation means that the deficit (target) must come down a bit, for us it’s not important.”

Remember, in the end, European politicians need to be able to tell their voters that they fought for them.   If the voters believe that leaders have fought for them, they won’t ask questions about all the wine these politicians will be drinking with each other thereafter.   And why should the voters care about politicians drinking wine when the Italian budget will now be paying them for doing nothing.

U.K. Ultimately Wants a Deal:  U.K. Prime Minister, Theresa May, has been tweeting up a storm these past few days in an effort to gather backing for the BREXIT vote in the House of Commons.   Current polling suggests she’s probably 40-45 votes shy of the 320 needed to get passage.   But the PM has two weeks to grease the wheels of politicians on the fence (the vote isn’t expected until December 12th) and we expect she’ll have to spend most of the £13.1 billion in savings on domestic programs.   That’ll keep the politicians fat and happy.

Trump claims China wants a Deal too:   And we believe him, we just think Trump’s own administration doesn’t want a deal … and for good reason.   Trump believes that the trade deficit with China is bad and the ‘deep state’ remains concerned about China espionage and technological theft.   There won’t be a China deal at the G-20 but we fully expect that politicians on both sides will make it sound like one is coming.

Meanwhile, Russia got a deal on a few Ukrainian warships:  We wondered when the Crimean situation would take a turn for the worse, and now we have something we need to keep close eyes on.

As background, Recall that Russia took Crimea in order to have more direct access, and an expanded naval presence, on the Black Sea.   But Russia’s only means of moving military assets to Crimea remains through southern Ukraine.  Russia wishes to control southern Ukraine so that it can have land-based access to Crimea, which is why southern Ukraine remains in civil war with Russian-backed rebels.   Essentially, Russia hopes to surround the Sea of Azov in order to control it.   Ukraine finds this unacceptable.

Russia has since declared waters to the east of Crimea to be Russian territorial waters and ‘temporarily’ shut down the Kerch Strait.   Russia now controls both sides of the Kerch Strait and by closing it off, they essentially shut down vital shipping lanes for Ukraine into the Sea of Azov.   Ukraine disregarded Russia’s closure of the strait and sent a few warships through, which were subsequently fired upon and seized by the Russian navy.

 

 

We are concerned about the latest Russian developments, which confirm Russia’s ambitions to slowly retake former Soviet territory.   Ukraine is implementing martial law today, which will suspend upcoming elections.   We don’t know yet if Ukraine will increase its military response, but such an outcome seems likely.

Meanwhile, German Foreign Minister, Heiko Maas, said today that a Russian blockade of the Sea of Azov is “unacceptable” and “Developments in Ukraine are worrying.”   Outgoing U.S. Ambassor to the United Nations, Nikki Haley, called Russia’s actions “arrogant” and a “violation of Ukraine’s sovereignty”.  We wonder how long Russia can press on with its ambitions before eliciting a military response.

DRAGHI ACKNOWLEGES SLOWER GROWTH, BUT SAYS INFLATION WILL STILL RISE:

European Central Bank President Mario Draghi said today that Eurozone growth has slowed somewhat, but that is ‘normal and may be temporary.’   Meanwhile, Mr. Draghi went on to say that “There is good reason to be confident that underlying inflation will gradually rise in the period ahead…Recent developments confirm the Governing Council’s earlier assessments of the medium-term inflation outlook.”

We wonder what part of the forecast Mr. Draghi has more confidence in, inflation going up or growth slowdown being only temporary?   In any event, these developments likely put an ECB rate hike even further out on the horizon.

GERMAN IFO BUSINESS CLIMATE INDEX FELL ONCE AGAIN IN NOVEMBER:

The German IFO Institute Business Climate Index declined for the eighth time in the past ten months, down -0.9 points to 102.0 in November.  Moreover, the index is at the lowest level since July.  Note, the Business Situations Index fell -0.7 point to 105.4 and the Business Expectations Index fell -1.0 points to 98.7.

 

 

DALLAS FED MANUFACTURING INDEX SLOWED MEANINGFULLY IN NOVEMBER:

Today, the Dallas Federal Reserve reported that the Current General Business Activity Index fell -11.8 points to +27.6 in November In the month, there were notable declines in every category.  Current New Orders fell -9.2 points, Production fell -9.2, Capacity Utilization fell -6.0, Unfilled Orders fell -1.4, and Shipment Volumes fell -8.9 points.   As for the outlook, manufacturers had a slightly less positive business outlook, as the Forecast fell -9.9 points to +25.7.   Note that inflation expectations are now in meaningful decline within most Fed surveys.

 

 

CHICAGO FED NATIONAL ACTIVITY INDEX IMPROVED IN OCTOBER:

According to the Federal Reserve Bank of Chicago, the Chicago Fed National Activity Index (CFNAI) improved +0.10 points to +0.24 in October, driven higher by employment and hours worked (up 0.14 points).  However, it should be noted that Production & Income fell -0.03 points and Personal Consumption and Housing fell -0.01 points to -0.05.

 

 

AMERICAS:

U.S. GDP:  Our GDP model sees 3%+ Real GDP growth through Q1 2019, but slower growth thereafter (downshifting to 2%).  Our model doesn’t factor in the stimulus from the recent tax cut, so the growth reversal in 2019 could be more pronounced than our model appreciates (it is presumed that 2018 will be better than our model due to the tax cut, whereas the delta for 2019 would be worse than our model predicts).

U.S. Inflation:  U.S. inflation appears to have hit a peak two months ago and with oil prices down and the dollar index up, we believe inflation has peaked (for now).   

U.S. Federal Reserve:  The Fed is signaling that rates will be 100 bps higher by the end of 2019, and with inflation peaking, we believe that they’re wrong.   With signs that both inflation and growth are moderating a touch, we don’t even think they should hike in December at this point (but they will).  But the odds of additional rate hikes are falling for 2019, which means we are getting closer to a Fed pause.

U.S. Treasuries:  Although recent inflation data has been cooling, the job market remains tight and Real GDP trending is still trending well above +3.0%.  With that in mind, we still believe the yield on the 10-year U.S. Treasury will trend higher (but it’s getting harder to reach 3.50% as inflation and growth slow). 

U.S. Equities and Earnings:  S&P 500 operating earnings are rising materially, but the market seems to be repricing forward earnings.  Our SPX target is for an 18.5x P/E on 2019 forward earnings of $165, bringing our 2018 SPX target to 3,050.  We prefer financials given expectations for economic growth and an improving (steepening) yield curve.

Argentina:  The macro looks abysmal in Argentina, and they have IMF involvement, but there is a silver lining here in that Q2 GDP was so bad that it might be hard for Q3 to be negative!  Overall, Argentina’s economic condition appears to have weakened in 2018.   Inflation is at a lofty 39.5%, Industrial Production is down -11.5% Y/Y, Exports are down -4.8% Y/Y, Consumer Confidence has deteriorated since January, the Economic Activity Index collapsed in May, and Unemployment jumped to 9.6% in Q2 (7.2% in Q4 2017).

Brazil:  Following Brazil’s election, Consumer Confidence has turned higher and PMI’s have indicated a return to growth.  We are encouraged by recent developments, but with the Bovespa near its record high, we need to see more follow-through with macro data Currently, GDP is up just 1% Y/Y, Industrial Production is down -2.0% Y/Y, Retail Sales slowed to +0.1% Y/Y, and Unemployment continues to be elevated (11.9% in September, which is an improvement).

Canada: Canada’s housing market has been weak but recent data have shown signs of life in housing starts.  Not to mention, Retail Sales have improved for two straight months.  Canada’s monthly Real GDP had been in a slowing trend for a year, but improved slightly in August.  Employment picked up in October as the Unemployment Rate fell to 5.8% from 6% two months ago.

Mexico: Mexico’s macro data is mixed.  Manufacturing PMI’s are hovering at or below the “50” level, But retail sales accelerated to a 4.1% Y/Y rate, Confidence is strong, and GDP is up 2.5% Y/Y.  Note that Unemployment increased to 3.6% in September, which has been trending up slightly since May.

Venezuela: Remains uninvestable.

EMEA:

United Kingdom:  BREXIT drama aside, inflation has been in a slowing trend in 2018, unemployment has been declining, wages have been turning up, and PMI’s have been steady.   Even the big macro risk, housing, hasn’t shown much weakness.  In fact, home prices improved slightly in August on a Y/Y basis.

European Union:  Although Unemployment continues to trend lower, Industrial Production is now up +0.9% Y/Y, and Retail Sales are now up +0.8% Y/Y, Economic Sentiment is turning lower, and PMI’s have turned back from recent highs, and the political situation has gotten so bad that Merkel isn’t going to run again.  The events in Italy foreshadow possible macro risks for Europe, as monetary accommodation is removed.  We still believe Europe is uninvestible.  

European Central Banks:  The ECB is slowly removing accommodation and has reiterated its claim that bond buying is over in December (Draghi said so today, actually).  But Mario Draghi hasn’t given a timeline for raising rates and the recent decline in CPI will give them even further pause for doing so

Eastern Europe: Ukraine situation aside, we saw earlier in the year with Italy, nations with high debt levels can rapidly become front-burner macro items.  The same can be said for Eastern Europe, given high Debt/GDP levels, most notably Cyprus (104%), Croatia (88%, up from 66% at the end of 2013), and Slovenia (81%).   We also have the EU Article 7 issues against Hungary and Poland to watch as well.  The world is turning farther right, and pressure from unelected EU leaders will only push these nations further right.

South Africa We remain highly negative on South Africa, but we have noticed recent efforts by the ANF to walk back some of the rhetoric.   The ANF is now trying to reengage with foreign capital and wants to liberalize some of the rules around mining investment.   Politics aside, the macro picture is getting bleaker by the day as Business Confidence is rolling over, GDP is negative, Inflation has turned up, Retail Sales are barely positive, and PMI’s are bouncing around the ‘50’ level.  None of this will help unemployment (27.2% in Q2).   In our view, the mere risk of having assets appropriated will grind foreign capital commitments and new business investment to a screeching halt, and more time is going to need to pass in order for foreign investors to feel any degree of confidence.  Our best guess is that more downside exists for South Africa’s economy and we believe the currency and equity market will suffer as a result.

Turkey:  Remains uninvestable.

ASIA / PACIFIC:

Australia:  The Australian data remain mixed but we have serious concerns about the decline in building approvals and new home loans, as well as China exposures.  With that in mind, we have a short view on Australian equities.  So far, the macro remains OK as the Unemployment Rate appears to be ticking lower (to +5.0% in September), Real GDP accelerated to +3.8% Y/Y in Q2, Exports are up +15.9% Y/Y, Wages are up +2.1% Y/Y, Retail Sales accelerated to +3.7% Y/Y in September, and Consumer Sentiment has ticked slightly higher recently.  However, consumer credit remains elevated and the value and number of home loan approvals and permits have turned negative, which is a bad sign as home prices have turned negative as well.

China:   It’s officially a trade war and Jack Ma thinks we’ve got 20 more years to go.  We have the under on 20 years, but the over on 1 year as China isn’t even interested in meeting with the Trump Administration at this time (although there is a token Xi/Trump meeting on the calendar).  China claims it’s going to pull out all the stops, is going to ‘encourage’ institutions to buy stocks, and there is talk of cutting taxes.   We doubt any of this will work to plug the large liability problem in China’s banking system.

We continue to believe that trade talks aren’t going to get better for quite some time and China will use every tool in its arsenal, which includes Renminbi depreciation.  It is notable that China is already working to stimulate its banking sector by lowering reserve requirements and encouraging banks to do “debt for equity’ swaps.  Note that PMI’s continue to indicate slow growth, Industrial Production is slowing, and now China may have an inflation problem.

India:  Indian economic activity appears strong, which runs counter to worries about shadow banking issues.  Commercial Credit accelerated to +14.6% Y/Y in October, Industrial production has been strong, M3 money growth has been steady at 10%, and PMI’s still show growth (albeit slower).  We are watching to see if any deterioration happens.

Indonesia:  Indonesia had gone four years without raising rates, but now rates have been hiked +125bps since Mid-April.   Indonesia’s GDP and Private Consumption Expenditures are up over +5% Y/Y, Consumer Confidence has been stable, Manufacturing PMI had been stable in the 49-51 range for a year and slowed to 50.5 in October, Industrial Production rebounded +9.0% Y/Y.  However, Retail Sales slowed slightly to +3.9% Y/Y and Exports slowed to +3.6%.  If there’s one emerging market that we’d be inclined to be bullish, this would be it, but we’d need to see the free-fall in the currency come to an end first. 

Japan:  Overall, the economic data have been mixed but we are encouraged by Prime Minister Abe’s promise to fix social security, immigration, and workforce participation.   We are slowly becoming positively biased.

Russia: Russia just can’t help itself.   The sanctions are beginning to have an impact on Russia and Russia is up to its antics again with Ukraine.  We find Russia uninvestible at this time.

South KoreaOverall, the economic data have been mixed.  While the world looks forward to peace on the Korean Peninsula, we are keeping an eye on trade data into China, which increased +17.7% Y/Y in October.   Also, GDP increased +2.0% Y/Y in Q3, Income is up +4.2% Y/Y, Industrial Production increased +0.9% Y/Y, and the Unemployment Rate improved to 3.9% in October.  Conversely, Retail Sales slowed to +3.0% Y/Y.

MACRO TRADE IDEAS:

 

 

GLOBAL CENTRAL BANK SCORECARD:

 

 

WEEK IN REVIEW – BEST & WORST PERFORMERS:

S&P 500 SECTOR PERFORMANCE:

 

 

BEST/WORST PERFORMING WORLD BOND MARKETS:

 

 

BEST/WORST PERFORMING GLOBAL STOCK MARKETS:

 

 

CURRENCIES PERFORMANCE:

 

 

COMMODITIES MARKET PERFORMANCE:

 

 

MAJOR GLOBAL STOCK MARKETS:

 

 

MAJOR GLOBAL BOND MARKETS:

 

DISCLOSURE APPENDIX

This publication is for Institutional Investor use only and not for distribution to the general public. The comments herein are based on the author’s opinion at a particular point in time and may change at any time without notice. Merion Capital Group does not guarantee the accuracy or completeness of the information contained herein. Merion Capital Group is a FINRA-registered broker-dealer. Merion Capital Group shares in the commissions for trades that are executed through Tourmaline Partners, LLC, a FINRA-registered broker-dealer. This report is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Past performance is not a guarantee of future performance. All investments involve risk, including the loss of all of the original capital invested.

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